At the thought of accounting, the first thing that comes to mind is well kept records such as balance sheets and financial statements. These records give an account of activities in a business, the cash that is flowing in (income) and the cash that is flowing out (expenditure).
Accounting can be defined in different ways. The most used definition is that accounting is the recording, summarizing, reporting, and analyzing of business transactions in a business. Accounting can be an automated exercise (use of accounting systems), or a manual exercise.
When analyzed, the information can be grouped into three; Operating Information, Financial Accounting Information, and Managerial Accounting Information. The Operating Information is used in the daily running of the business organization. It is the basis of the other two types of information. Financial information is used externally. It is the information needed by other interested bodies such as financial institutions, potential clients, the government, and any other interested party. Managerial information is used by the managers in an organization to help them make timely decisions.
For the information to be considered valid, there are set standards that must be met. The Generally Accepted Accounting Principles are established by the Financial Accounting Standards Board. There are no legal obligations for companies to compel to the standards, but there are practical reasons why the standards should be adhered to.
The GAAP requires for three different statements. The Balance sheet shows the resources that an organization has at a given time; cash in bank, creditors, and value of what the company owns. The other statement is the Income Statement. This is also known as the Statement of earnings, or Operations, or a Profit and Loss Statement. This one shows the income and outcome of cash in a business, over a given period of time. The third statement is the Statement of Cash Flow. The Statement of Cash Flow shows the flow of cash over a specified period of time.
Of the financial reports, the most important part is the Cash Flow Statement. This is because the flow of cash is what determines the success or failure of a business. The cash flow statement determines the decisions made, as well as the actions to take. In general, any company will be valued according to its Cash Flow Statement.
Jay S. Rich, Jefferson P. Jones, Maryanne M. Mowen, Don R. Hansen. “Cornerstones of
Financial Accounting.” Connecticut: Cengage Learning, 2009.